Looks like Microsoft hasn’t given up on Zune HD just yet. CNET is reporting that the next firmware update to Microsoft’s iPod challenger will bring XviD codec support to the media player.   According to the article, DivX support might not be coming.

The Zune HD is definitely one of the better alternatives to the iPod and if it weren’t for Microsoft’s decision to sell it in the US only, chances are, it might give the iPod some competition. The firmware is also set to bring Smart DJ to the media player. Smart DJ is a Zune 4.0 PC software feature that automatically plays songs similar to the one you choose. The feature on Zune HD would mean that one can stream Zune Pass content and media between devices on the same network.

The firmware update is expected around May. iPod’s lack of format support has always been a bone of contention, since XviD is a widely used format for videos, Microsoft’s decision will be welcomed by enthusiasts as it makes it easier to enjoy videos on the Zune HD’s 3.3″ OLED screen.